Dr. Ehrlich, call your office

Michael Giberson

I ended my semester in “Energy and Environmental Economics” talking about resource optimism and resource pessimism, framed mostly as a big picture debate between Julian Simon and others against Paul Ehrlich and Neo-Malthusians. Simon reports being puzzled at how folks could look at data showing human health and well-being getting better and better and come to the conclusion we were all doomed and it was probably too late to do anything about it.

I’m sure upon reading this New York Times story the pessimists will be as troubled as ever: “Life Expectancy Rises Around the World, Study Finds.”

So much oil that we don’t need infrastructure to develop it?

Michael Giberson

At InsideClimate News Elizabeth Douglass has a long, sprawling article tying together projections of U.S. oil production growth sufficient to turn the U.S. into an oil exporting nation and the political opposition to the Keystone XL pipeline. But the link between resource optimism and infrastructure obstructionism is a bit of a non sequitur. We ought to be careful about jumping from evidence of commercial success to justifications for more political control over commerce.

In July, the Manhattan Institute’s Mark Mills produced a report suggesting the presence of sufficient hydrocarbon resources within North America to more than meet North American needs and allow exports too. The economic potential of such development should lead us to adopt supportive policies, he said. Mills report notes similar projections coming from a variety of industry analysts and government energy agencies. Douglass’s article quotes Mills saying, “We’re about to have a gusher of oil.”

The article then describes how the lack of pipeline infrastructure has hampered oil production in North Dakota, and even more so in Alberta, such that oil at these locations trades at a significant discount to world oil prices. The lack of pipeline infrastructure leads producers to resort to more costly transportation methods – barges, trains and trucks – to get oil out. The higher transport costs cuts into the price paid to producers.

So far, so good. The tight oil boom has surprised the industry as much as the shale gas boom did a year or two sooner. Given the typical delays involved in (a) recognizing the need for a pipeline, (b) developing a plan and gaining financial commitment, (c) getting the pipeline permitted and securing the rights-of-way, and (d) actually building the pipeline, it isn’t surprising that pipeline infrastructure doesn’t yet match up to the changing patterns of production. Step (c) in that list is the big time sink, as both the politics of permitting and working with landowners has become more difficult. (Pro-pipeline conservatives ought to recognize that restraints on eminent domain are, from the point of view of the developer, part of the problem.)

The Douglass article then shifts into the politics of oil exports, noting that exports from the U.S. into Canada have been increasing lately “to the highest level in more than a decade,” at about 77 thousand bbl/day. Curiously, perhaps in an effort to dramatize the export, the article fails to explain that this is a trivial amount. No only does the U.S. produce nearly 6 million bbl/day, we also import about 2 million bbl/day from Canada. The 77 thousand bbl/day is the equivalent of returning to Canada about 3 percent of what is initially shipped south. (Data available from EIA.)

We have seen the political noise surrounding the potential exports of natural gas–the Obama administration has delayed a key report on the issue until after the election, in a move widely interpreted as helping him avoid immediate political fallout from any firm decision on the issue. There have also been scattered complaints about exports of refined petroleum products. Actual net export of U.S. crude would surely provoke additional political complaints.

The Keystone XL pipeline gets mentioned along the way in Douglass’s article, initially characterized by proponents as essential to development of new resources. But once the North American oil export prospects are discussed, the presentation shifts to the politics of the Keystone XL pipeline. In a quite clear distinction between the worldviews of commerce and politics, in politics the North American oil boom flips 180 degrees from the reason the pipe is needed into the reason the pipe is unnecessary.

“If the public realizes that [the Gulf Coast refiners] don’t need the Keystone XL … I think it would have a huge impact on support for the project,” said Anthony Swift, an attorney at the National Resources Defense Council, which has campaigned against the pipeline for years.

And not just environmentalist are arguing the boom makes the pipeline unnecessary. The article gives the last word to energy economist Philip Verleger Jr.:

Oil economist and consultant Philip Verleger Jr. said the Keystone XL will be a victim of that rapid change. Verleger is a visiting fellow at the Peterson Institute of International Economics whose opposition to the Keystone project has rankled the industry…

“The people who are saying we really need this [Keystone XL pipeline] don’t recognize that circumstances have changed,” said Verleger, who recently predicted that America will begin exporting more energy than it imports within the decade.

“The Keystone XL is going to be just like an Egyptian pyramid. Useless.”

There might be just a little bit of a slip embedded in the characterization of Verleger’s view. “Begin exporting more energy than it imports” is a phrasing that presumably incorporates coal exports into the equation, though coal is nowhere else mentioned in the article. I suspect Verleger’s views are more subtle than presented. Still, if he said the pipeline will be useless, that is a pretty clear statement.

[By the way, note that I'm not saying Douglass herself it claiming that the potential for eventual oil exports is reason to oppose the Keystone pipeline. Her sprawling article just takes notice that this line of argument is being raised.]

In Mill’s Manhattan Institute report the Keystone pipeline gets mentioned briefly, as an example of the current obstructionism that will hold back the potential economic boom that would come from truly forward looking policy. Not too surprisingly to regular readers, I’ve got to lean toward Mill’s view here.

We may or may not turn into oil exporters in a decade or two, I’m not a forecaster of such things, but it pretty clear it can’t happen if we return to a path of greater political management of energy resource flows. If Verleger thinks the pipeline will be useless, he shouldn’t invest in it and he should advise his clients not to invest in it. Other commercial interests clearly hold an opposing view, and they are willing to invest their money in the project.

If we rely mostly on the commercial worldview to direct energy resources, the pipeline probably gets built and we may well be on our way to cheaper energy and oil exports. If we instead give precedence to a political worldview to manage energy resource development and movement, energy becomes costlier and in short supply.

Politics has an appropriate role to play in addressing environmental issues, but we will all live happier, healthier, cleaner lives if we keep politics focused on solving environmental problems and let commerce direct which way energy resources flow.